Can Red Hat Continue Its Upward Trajectory?

The NASDAQ listed stock Red Hat (RHT) has been a market darling year-to-date (YTD), returning 13.19% in capital gains compared to the NASDAQ index which has delivered 6.94%. That’s an impressive 6.25% percentage points of outperformance. Red Hat delivers it’s FQ1 ’16 results this afternoon and has provided guidance for an EPS figure of $0.41 and a revenue number of $471.5M. The Estimize community are predicting an EPS figure of $0.42 as compared to Wall Street consensus predicting a figure of $0.41.

Red Hat, has in the past tended to beat market expectations. Over the past five quarters, the reported EPS figures by Red Hat has on average beaten Wall Street consensus by a sizeable 4.96%. This compares to Estimize where the reported figures have only beat the consensus by 1.92%.

Similar to EPS, Estimize are predicting a higher revenue number than Wall Street. The Estimize community are predicting revenues to be $475.24M compared to $472.24M as projected by Wall Street.

Red Hat has successfully built an attractive pipeline of products and in the process accumulated market share. Its key business units such as cloud computing and its open-source Linux operating software are expected to excite investors in the future. Further, its impressive partnerships with household names such as Dell, Intel and IBM are comforting investors at present. The stock is currently hovering very close to its 52-week high of $79.35.

Investors must be cautious however, Red Hat is currently trading at a trailing PE multiple of over 80X earnings. Therefore, any disappointment on the earnings or revenue figures will likely cause the stock to re-rate downwards. Company guidance and outlook will also be key to the success of the stock following its quarterly announcement. Investors and analysts are likely to place a great deal of importance on the company’s expectations for future billing growth and will be disappointed if any guidance falls short of expectations.